Multiple Claims Exceeding The Policy Limits

August 17, 1999

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Bad Faith, Vol. 13, #8, p. 22 (Aug. 17, 1999). Copyright Butler 1999.

When courts and state legislatures expand the duties owed by liability insurers to insureds there is a commensurate expansion of the grounds for extracontractual claims. One area of expansion has been in cases involving multiple third-party claimants – with liability clear and damages exceeding the policy limits. These cases make difficult issues for claims professionals.

This article will outline the major judicial approaches to the problem and then will brief the leading cases. Although most of the cases discussed below did not decide bad faith issues, many created or defined the duties of an insurance company in the division of policy proceeds among multiple claimants. Adherence to the approved approach will reduce bad faith exposure for the insurer.

The overarching duty of the insurer in multiple claimant/excess exposure cases is to minimize the insured’s exposure. This requires a thorough investigation and evaluation of all claims, knowledge of the approach taken by the governing court, and the formulation of a settlement strategy that achieves the objective. Extracontractual exposure can be reduced by fulfilling this duty and by frequent and meaningful communications with the insured atevery stage.

- INTRODUCTION
- JUDICIAL APPROACHES
1. Overview – Courts have developed several approaches. Some have embraced a first-come-first-served rule, based either on the first to settle(those claimants who accept settlement, will be paid in the order in which they settled) or first to judgment (the first claimant to secure judgment is entitled to be paid first). Others have employed the pro rata rule (the policy limits are to be pro-rated among all claimants based upon their total claims).

1. First-Come-First-Served Approach
  1. Majority Approach – The first-come-first-served rule has been in place for a considerable amount of time and has been adopted by the majority of jurisdictions in this country.
  2. Origins – This approach is derived from two similar, but distinct, lines of cases. One line of cases held that third parties who obtained judgments or were about to obtain judgments against an insured indifferent actions could have the policy proceeds distributed on a first-come-first-served basis according to the priority of the judgments. A second line of cases held that an insurer could settle with some third-party claimants and thereby exhaust or deplete the policy limits such that judgments subsequently obtained by other claimants could not be collected. Some courts have not followed the first-come-first-served approach in cases where claims arising from a single event have been joined in one suit and reduced to judgment. In those situations some courts have held that the policy proceeds should be distributed on a pro rata basis in accordance with the amount of damage suffered by each claimant.
  3. First to Settle
    1. Generally – The greatest number of multiple claimant/excess exposure decisions involve cases where an insurer has settledwith some but not all claimants, and either has exhausted the policy limits or left only a small amount remaining.
    2. Unfairness – There are some unfair aspects to the “first come first served” approach, particularly from the claimants’ perspective.
      1. Severely Injured Claimants Suffer – Claims involving severe injuries take longer to settle because more time is needed to determine the ultimate prognosis and loss. Accordingly, settlements involving minor injuries can eat up a disproportionate amount of the available limits before realistic negotiations begin on the serious injury claim.(1)
      2. Undervalued Settlements – An insurer can use the combined limits as a whip to force settlements at figures below their actual values.(2)
      3. Favoritism – An insurer can favor an attorney or a claimant without further responsibility to others and it is very difficult to prove bad faith under those circumstances.(3)
    3. For cases which approve of an insurer’s right to settle any one or more of multiple claims within the policy limits on a first-come-first-served basis, even if such settlements exhaust those limits and leave some claims unsettled, provided such settlements are reasonable and made in good faith, see Hartford Cas. Ins. Co. v. Dodd, 416 F. Supp. 1216 (D. Md.1976); State Farm Mut. Auto. Ins. Co. v. Hamilton, 326 F.Supp. 931 (S.C. 1971); Grand Sheet Metal Prods. Co. v.Protection Mut. Ins. Co., 375 A.2d 428 (Conn. 1977); StateFarm Mut. Ins. Co. v. Murphy, 348 N.E.2d 491 (Ill. App. Ct.1976); Castoreno v. Western Indem. Co., 515 P.2d 789 (Kan.1973); Lowe v. Continental Ins. Co., 437 So. 2d 925 (La. Ct.App. 1983); Liguori v. Allstate Ins. Co., 184 A.2d 12 (N.J.1962); see also Pat Magarick, Excess Liability, § 8.09, at 8—28n.15 (3d ed. 1997).
  4. First to Judgment
    1. Generally – In a majority of cases, courts have held that liability insurers can distribute the proceeds of inadequate insurance to judgment creditors on the basis of priority of judgment.
    2. For cases which approve distribution on the basis of the priority of the judgments, see Sampson v. Cape Indus., Ltd., 540N.E.2d 1143 (Ill. App. Ct. 1989); Goad v. Fisher, 257 A. 2d 433(Md. 1969); David v. Bauman, 196 N.Y.S.2d 746 (N.Y. Sup. Ct.1960).
2. Pro-Rata Allocation
  1. Generally – Some courts have given their imprimatur to allocation of policy proceeds on a pro rata basis, in accordance with the amount of damage suffered by each claimant.
  2. Allstate Ins. Co. v. Ostenson, 713 P.2d 733 (Wash. 1986)
    1. FACTS – Jason and Jayme Ostenson and Barry Buckmaster were passengers in a car owned by Bruce Williams, which was involved in a two-car accident. The Williams’ car carried underinsured motorist (UM) coverage of $25,000 per person and $50,000 per accident. The Ostensons made claims against the Williams’ UM coverage. The parties stipulated to the following damages: Jayme Ostenson—$2 million; Barry Buckmaster – $150,000; Jason Ostenson, $30,000. The trial court granted the Ostenson’s motion that the “per person” policy limitations would not apply when dividing the fund.
    2. REASONING – The court announced the “general rule” that” where several claims arising from one incident are asserted in one suit or interpleader against an insurer whose maximum liability under its policy is insufficient to pay the claims in full, the proceeds are to be distributed on a pro rata basis in accordance with the amount of damage suffered by each claimant.” Following the decision in Standard AccidentInsurance Co. v. Winget, 197 F.2d 97 (9th Cir. 1952), and the “very clear” language of the policy the court enforced the “per person” limitation. It remanded the case for the following distribution: Jayme Ostenson—$25,000; Barry Buckmaster—$20,000; Jason Ostenson—$5,000. If the trial court’s decision had been upheld the distribution would have been as follows: Jayme Ostenson – $46,000; Barry Buckmaster – $20,000;Jason Ostenson – $500.
    3. HOLDING – When multiple insurance claims exceed the maximum coverage provided by the policy, each claimant’s right to his pro rata share of the proceeds is limited by the maximum “per person” coverage provided by the policy.
  3. For other cases applying the pro rata rule where several claims are joined in one suit, see Sheehan v. Liberty Mut. Fire. Ins. Co., 258 So.2d 719 (Ala. 1972); Johnson v. State, 450 So. 2d 1311 (La. 1984);State Farm Mut. Auto. Ins. Co. v. Sampson, 324 So. 2d 739 (Miss.1975); Christlieb v. Luten, 633 S.W.2d 139 (Mo. App. 1982);Wasserman v. Glen Falls Ins. Co., 240 N.Y.S.2d 917 (N.Y. App. Div.1963); Wondrowitz v. Swenson, 392 N.W.2d 449 (Wis. Ct. App. 1986)
  4. Multiple Actions – Courts have applied also the pro rata rule whenmultiple claimants obtain judgments in different actions against theinsured. See, e.g., Burchfield v. Bevans, 242 F.2d 239 (10th Cir.1957) (applying Oklahoma law); State Farm Mut. Auto. Ins. Co. v.Hamilton, 326 F. Supp. 931 (D. S.C. 1971); Century Indemnity Co.v. Kofsky, 161 A. 101 (Conn. 1932); Underwriters for Lloyds of London v. Jones, 261 S.W.2d 686 (Ky.1953).
  5. Unfairness – An insurer may have to wait until it is certain that all claims have been presented, or until the statute of limitations has run, before making any payments. Thus it can be a long time before multiple claimants can be paid, and the case is totally resolved.
3. Statutory Allocation
  1. Generally – One author(4) has suggested that in jurisdictions having compulsory motor vehicle insurance laws, which seem to have as their object the protection of injured persons, distribution should be provided for by statutory enactments.
  2. Provisions – Such a statute could provide that:
    1. in cases where an insured is insolvent or it is apparent that he is unable to pay all judgments that may be obtained in excess of his insurance, the situation must be publicized, as in bankruptcy or the administration of decedents’ estates;
    2. all claimants must submit their claims by a certain time;
    3. after this certain time, distribution will be made pro rata among those claimants appearing and proving their loss; and
    4. settlements would be prohibited since they would permit unequal distribution.
  3. The New York Statute(5) – The distribution of liability insurance proceeds among judgment creditors of proprietors of motor vehicles for hire is fixed by a statute providing that the owner, with certain exceptions, has to file a bond or an insurance policy for the payment of any judgment rendered against the insured because of bodily injury or property damage arising from accidents in which the vehicle was involved, that liability on the policy could be limited, and that the proceeds of the insurance were to be apportioned ratably among the judgment creditors according to the amount of their respective judgments.
- GOOD FAITH/BAD FAITH
1. Generally – Few cases addressing the obligations of insurers in settling pre-judgment multiple claimant/excess exposure cases existed prior to the1960’s and 70’s.
2. Significant Cases
  1. Brown v. United States Fidelity & Guaranty Co., 314 F.2d 675 (2dCir. 1963) (applying New York law)
    1. FACTS – While negligently operating a motor vehicle, the insured was involved in a motor vehicle accident with a taxicab. The insured was covered by a policy issued by USF&G that provided liability coverage in the amount of $10,000 per person and $20,000 per occurrence. As a result of the accident, the three occupants of the taxi and the insured’s passenger were seriously injured. The insurer settled with the insured’s passenger and the taxi cab driver for a total of$14,000. The two passengers of the taxi cab eventually filed suit against the insured and obtained judgments in the amount of $45,000. Thereafter, the taxi cab passengers took an assignment from the insured and sued the insurer for bad faith, claiming that the insurer conducted settlement negotiations in bad faith and abandoned the interests of the insured.
    2. REASONING – The court found that there was sufficient evidence of the insurer’s bad faith to warrant submitting the case to the jury. Overall, the court found that the insurer’s over-eager settlement of the claims in disregard of the possibility of the insured’s resulting personal liability could possibly support a finding of bad faith if submitted to a jury. The court enumerated six “elements” of misconduct on the part of the insurer: (1) failing to abide by the agreement among the parties to try to effect an equitable settlement of the four claims within $20,000; (2) settling with the insured’s passenger without informing the other claimants and without adequate information of the relative seriousness of the claims; (3) lacking concern for the renewal by the two taxi cab passengers of the irequitable settlement proposal; (4) grossly misrepresenting to the insured the plaintiffs’ intention to reach insured’s person alassets; (5) failing to inform the insured of any of the settlement proposals or possibilities; and (6) failing to conduct anadequate investigation into the possible contributory negligence of the insured’s passenger and the accident scene.
    3. UPSHOT – An insurer will not be insulated from bad faith by simply settling on a first-come-first-serve basis. The insure must still consider all outstanding claims, their value, and how much they will reduce the insured’s potential personal liability before settling with certain claimants. Moreover, the first-come-first-served approach does not vitiate an insurer’s duty to still act in good faith with respect to the insured.
  2. Liberty Mutual Insurance Co. v. Davis, 412 F.2d 475 (5th Cir.1969) (applying Florida law)
  3. FACTS – Clinton Bess, the insured, rear-ended a vehicle occupied by Mr. and Mrs. Lewis Rawls. The insured’s car careened head-on into a car occupied by the plaintiffs, Mr. and Mrs. Oliver Davis and their three children. The double collision resulted in serious injury to the five Davises and the two Rawlses.
    The insured had a policy of insurance with Liberty Mutual with limits of $10,000 per person and $20,000 per accident. It was evident to the insurer that the claims would exceed the policy limits; the insurer also could not expect any contribution from the insured since he was insolvent. The Davises’ attorney offered to settle for the policy limits. Liberty Mutual refused the settlement offer fearing that it would be liable to the remaining claimants if it depleted the entire amount of the insurance proceeds by settling with only two of the seven injured parties.
    
    The Davises sued and obtained a judgment for $48,500. Their attorney then reasserted their offer to compromise their claims for the policy limits of $20,000. The insurer “took no action.” The Davises next petitioned for a writ of garnishment and eventually obtained the full policy limits. They then obtained an assignment from the insured and asserted a bad faith claimin order to collect the excess portion of their judgment.
  4. REASONING – The court framed the issue as follows in this case: “[B]earing in mind the existence of multiple claims and the insured’s exposure to heavy damages, did the insurer actin good faith in managing the proceeds in a manner reasonably calculated to protect the insured by minimizing his total liability?” Prior to framing this issue, the court discussed the insurer’s obligation to its insured:
    1. “When several claimants are involved, and liability is evident, rejection of single offer to compromise within policy limits does not necessarily conflict with the interest of the insured. He hopes to see the insurance fund used to compromise as much of his potential liability as possible. Of course, if the fund is needlessly exhausted on one claim, when it might cancel out others as well, the insured suffers from the company’s readiness to settle. . . . Insured defendants will want their policy funds to blot out as large a share of the potential claim against them as possible.”
    2. “It follows that, insofar as the insureds’ interest governs, the fund should not be exhausted without an attempt to settle as many claims as possible. But where the insurance proceeds are so slight compared with the totality of claims as to preclude any chance of comprehensive settlement, the insurer’s insistence upon such a settlement profits the insured nothing. He would do better to have the leverage of his insurance money applied to at least some of the claims, to the end of reducing his ultimate judgment debt.”
    3. The court concluded that “efforts to achieve a prorated, comprehensive settlement may excuse an insurer’s reluctance to settle with less than all of the claimants, but need not do so. . . . In many cases, efforts to achieve an overall agreement, even though entailing are fusal to settle immediately with one or more parties, will accord with the insurer’s duty. In other cases, use of the whole fund to cancel out a single claim will best serve to minimize the defendant’s liability. Considerable leeway, of course, must be made for the insurer’s honest business judgment, short of mismanagement tantamount to bad faith.”
    In closing, the court found that there was substantial evidence from which a jury could conclude that the insurer was guilty ofbad faith in giving more weight to its own interests than to the interests of the insured. The court then delineated what the jury could have reasonably found, including: (1) that the insurer failed to exercise proper diligence to determine the facts as to damages; (2) that the insurer failed to explore the possibility of settling with all of the claimants; (3) that the insurer failed to settle with the Davises, when the insurer had conceded the insured’s liability and knew that his exposure to damages would far exceed the policy limits.
  5. UPSHOT – Insurers must approach each and every multiple claimant/excess exposure case individually and not allow their decisions in previous cases to guide them. The insurer’s goal in these types of cases is to “blot out as large a share of the potential claim” against the insured as possible. Any inference that the insurer gave more weight to its own interests than to the interests of the insured will weigh heavily in the court’s mind when assessing bad faith.
3. Voccio v. Reliance Insurance Co., 703 F.2d 1 (1st Cir. 1983)(applying Rhode Island law)
  1. FACTS – William Lopes, Jr., driving his mother’s car, lost control of the car and hit two pedestrians, Mary Petrarca an dAnthony Voccio. Petrarca died eleven minutes after being hit. Voccio, an eleven year old child, lost the lower part of both of his legs. The Lopeses were nearly judgment proof and carried liability insurance of only $25,000. The Lopeses’ insurance company, Reliance, settled with Mrs. Petrarca’s husband for half of the policy amount, $12,500. Anthony Voccio and his father refused to accept the other half and sued the Lopeses. The Lopeses won a verdict for several hundred thousand dollars, and the Lopeses assigned to the Voccios their bad faith claim. The Voccios sued Reliance and prevailed on their bad faith claim. The court however granted Reliance a judgment n.o.v.
  2. REASONING – The First Circuit believed that the district court’s award of judgment n.o.v. was proper. It found that the Voccioshad to show that the “50—50 division of the insurance policy proceeds was highly unreasonable, reckless or in ‘bad faith’ -an exceedingly difficult task.” The court then outlined the facts in the instant case which rebutted any claim that Reliance acted in bad faith:
    1. Reliance met with counsel for both Petrarca and the Voccios and sought suggestions on how to divide the money – a course recommended in Farmer’s Insurance Exchange v. Schropp, 567 P.2d 1359, 1367 (Kan.1977).
    2. Unlike the claimant in Brown v. United States Fidelity &Guaranty Co., 314 F.2d 675 (2d Cir 1963), the Voccios did not agree to participate in an equitable division of the policy proceeds.
    3. The Voccios consistently refused to make any offer of settlement below the policy limits.
    4. Mr. Petrarca’s claim was substantial-his wife had been killed; she was conscious for a time before death (and thus may have suffered); and she was a housewife for the loss of whose services a husband can be compensated under Rhode Island law.
  3. UPSHOT – The court approved the first-come-first-served approach and placed the burden on the claimants to show that the insurer’s division of the policy proceeds was “highly unreasonable, reckless or in ‘bad faith.'” The court indicated that this was a very weighty burden of proof by declaring that proving such was an “exceedingly difficult task.” The case also demonstrates that a court will closely scrutinize an insurer’s decision to settle with one claimant when other claimants have not settled yet.
4. Texas Farmers Insurance Co. v. Soriano, 881 S.W.2d 312 (Tex.1994)(6)
  1. FACTS – Richard Soriano crashed head-on into a car driven by Carlos Medina, who suffered severe injuries. Medina’s wife was killed, and his two children were injured. Adolfo Lopez, a teenage passenger in Soriano’s car was also killed. The Medinas and Lopez’s heirs sued Soriano. He had liability coverage under a policy from Texas Farmers Insurance Group with limits of $10,000 per person and $20,000 per occurrence. Texas Farmers offered the full $20,000 to the Medinas, but they rejected the offer because they wanted to investigate Soriano’s personal assets. Texas Farmers settled the Lopez wrongful death claim for $5,000 and offered the remaining$15,000 to the Medinas, but they demanded $20,000.
    The jury found Soriano negligent and awarded the Medinas$172,187. Soriano assigned his rights against Texas Farmers to the Medinas in exchange for a covenant not to execute, and the Medinas sued Texas Farmers for negligence and bad faith. The trial court awarded the Medinas $520,577.24 in compensatory damages and $5 million in punitive damages. The appellate court reduced the punitive damages award to $1million but otherwise affirmed the judgment. See 844 S.W.2d808 (Tex. Ct. App. 1992).
  2. The court rejected the Medinas’ argument that the Lopez settlement was unreasonable, considering the more serious Medina claims by stating: “To be unreasonable, [the Medinas]must show that a reasonably prudent insurer would not have settled the Lopez claim when considering solely the merits of the Lopez claim and the potential liability of its insured on the claim.”
    The Medinas separately argued that Texas Farmers had breached its duty of good faith and fair dealing. Without deciding whether the first-party duty of good faith and fair dealing extends to third-party cases, the court held that the Medinas’ failure to make a settlement demand within the policy limits provided Texas Farmers with a reasonable basis for not settling with them.
  3. UPSHOT – Situations like the one in this case graphically illustrate the competing interests at work in multiple claimant/excess exposure cases. While even the $20,000 per occurrence limits could never compensate a family for the loss of a life, insurers cannot be held liable for the damages in excess of the policy simply because the coverage is inadequate. Soriano was responsible for both the level of coverage and the negligent acts which caused this tragedy. Ironically, Soriano escaped from this incident unscathed; not only did he obtain a non-execution covenant for the civil judgment against him, but the criminal charges were dropped as well.(7)
5. Allstate Insurance Co. v. Evans, 409 S.E.2d 273 (Ga. 1991)(8)
  1. FACTS – Steve Evans and Brian Branch were involved in a multi-vehicle collision. While their claims against the tort feasor were pending, the tort feasor’s insurer, Allstate, paid out$250,000 of the $300,000 in liability coverage in settlements with other victims. Allstate had previously rejected a joint offer by all of the claimants to settle for a total amount which was within the policy limits. Evans and Branch eventually obtained judgments of $35,000 each. Allstate tendered the remaining$50,000 in policy proceeds to Evans and Branch, who then sued Allstate to hold the insurer liable to them for the full amount of their judgments. The trial court ruled in the plaintiffs’ favor and Allstate appealed.
  2. REASONING – The Georgia Court of Appeals reversed. The court held that a liability insurer may, in good faith and without notification to other claimants, settled part of multiple claims against its insured even though such settlements exhaust the policy limits so that remaining claimants have no recourse against the insurer.
  3. COMMENTARY – One critic(9) has stated the following about the case:
    
    “Evans is a screwy decision. A liability insurer owes no duty of good faith to third-party claimants. There was no need for the court to address the problem of multiple claimants: Allstate’s exhaustion of the policy limits breached no duty that Allstate owed to Evans and Branch, for Allstate owed them no duty. The more interesting question is whether Allstate breached the duty of good faith that it owed to its insured. In general, an insurer incurs no liability to the insured if it exhausts the policy limits through a series of good faith settlements with some claimants, leaving no money with which to protect the insured from an unsettled claim. The important fact in this case, however, is that Allstate had an opportunity to protect its insured from all the claims but failed to take advantage of it. If Evans and Branch had taken an assignment from the insured, they might have had better luck.”

CONCLUSION

Endnotes:

Pat Magarick, Excess Liability § 8.09[2], at 8—37 (3d ed. 1997).
Id.
Id.
V.H. Cooper, Annotation, Basis and Manner of Distribution Among MultipleClaimants of Proceeds of Liability Insurance Policy Inadequate to Pay All Claims inFull, 70 A.L.R.2d 416, 418 (1960).
See N.Y. Veh. & Tr. Law § 370 (Consol. 1997); see also Bleimeyer v. Public ServiceMut. Casualty Ins. Co., 165 N.E. 286 (N.Y. 1929) (applying earlier version of NewYork’s pro rata statute).
See 10 Bad Faith L. Rep. 120 (Stephen S. Ashley ed., Aug. 1994); see also Sam Hawthorne, Note, Stowers Doctrine Catch—22 Resolved for Texas Insurers Facedwith Multiple Claimants and Inadequate Insurance Proceeds: Texas Farmers Ins.Co. v. Soriano, 881 S.W.2d 312 (Tex. 1994), 26 Tex. Tech L. Rev. 169 (1995).
Hawthorne, supra, at 182 n.132.
See 8 Bad Faith L. Rep. 16 (Stephen S. Ashley ed., Feb. 1992).
Id.

John Weihmuller

August 17, 1999

CONCLUSION